Dividend growth stocks provide investors with a rising stream of passive income, which grows over time. The consistent nature of dividend increases protects the dividend income against inflation. However, many dividend growth stocks actually tend to deliver dividend growth which typically exceeds the rate of inflation. Historically, U.S. stocks have managed to boost dividends above the rate of inflation by 2% – 3%.
There is typically a trade-off between dividend yield and dividend growth, that investors have to put up with. Generally, companies with the highest current yields tend to distribute most of their cash flows to shareholders, which leaves little room for investment in the business. This leads to low earnings growth, that trickles down into low dividend growth. Companies with low and medium sized yields however tend to distribute a low portion of their earnings to shareholders, with the rest reinvested in the business, thus providing fuel for future dividend increases.
There are a few companies which meet both criteria, when purchased at the right times:
Philip Morris (NYSE:PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company expects to generate 10%- 12% annual growth in earnings through its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Phillip Morris will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while paying an above average yield of 3.60% today. (analysis)
ONEOK (NYSE:OKE), a diversified energy company, engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company operates through three segments: ONEOK Partners, Natural Gas Distribution, and Energy Services.
The company enjoys strong performance in its ONEOK Partners (OKS) segment, which has resulted in increased distributions to ONEOK from the partnership. In addition, the company has been able to generate strong cash flow from its natural gas distribution segment.
ONEOK indicated in September 2011 that it expects to increase its dividend 50 percent by 2014 and affirmed a long-term dividend payout target of 60 percent to 70 percent of recurring earnings, subject to board of directors’ approval.
ONEOK announced on Friday it is considering increasing its July 2012 dividend above the 4-cent-increase it provided in September 2011. Yield: 3% (analysis)
Kinder Morgan (NYSE:KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments: Products Pipelines-KMP, Natural Gas Pipelines—KMP, CO2—KMP, Terminals—KMP, Kinder Morgan Canada—KMP, and NGPL PipeCo LLC. The company expects its acquisition of El Paso (NYSE:EP) to be completed by May 2012. This combination will lead to synergies and cost savings of approximately $350 million/year.
As a result of this transaction and KMI’s normal expected annual growth, KMI still expects its dividend per share to grow at an average annual rate of around 12.5 percent through 2015 from its budgeted 2011 dividend per share of $1.16.
The growth of KMI is being driven by Kinder Morgan Partners (NYSE:KMP), which expects to declare cash distributions of $4.98 per unit for 2012, an 8 percent increase over the $4.61 per unit it will distribute for 2011. Yield: 3.30% (analysis)
Note: KMI released first quarter earnings on Friday. First quarter 2012 earnings of 21 cents a share from continuing operations failed to meet the Zacks Consensus of 29 cents a share. However, quarterly earnings almost doubled from the year-earlier profit level of 11 cents. Total revenue in the quarter dropped almost 4% year over year to $1,857 million. The reported figure also failed to reach to expectations of $2,319.0 million. Kinder Morgan boosted its quarterly dividend to 32 cents a share, which is a 10% increase over 29 cents announced at the time when the company went public in February 2011. The declared dividend is equivalent to an annual dividend rate of $1.28 per share and the company expects it to be $1.35 per share in 2012.
Full Disclosure: Long PM, OKS, KMR and KMI